What is a Caveat Loan? – A Complete Guide

By: Aaron Robbins0 comments

One of the common enquiries we get at Diverse Funding Solutions is… ‘what is a caveat loan?’.

If you don’t know the answer to that question, don’t worry, you’re certainly not alone.

Are you considering a caveat loan? If yes, everything in this guide applies to you!

So, Exactly What Is A Caveat Loan?

A caveat is a term that’s used in property law. When you take out a caveat loan, you offer your property (real estate) to a lender as upfront security for the loan. This security is sometimes called ‘collateral’. The caveat means that you can’t sell your property unless the caveat is removed. The caveat is only removed when the loan is fully repaid.

What is the key difference between a caveat loan and a mortgage?

You might think that a caveat loan is similar to a mortgage loan. You’re right, but there are some differences. The main key is speed.

In some states of Australia, consent is required from the lender that holds the first mortgage (usually a mainstream bank with the home loan mortgage) before a second mortgage is able to be registered.

Obtaining consent from the first mortgagee can sometimes take time and because of this, some investors will settle a loan super fast with a caveat as no consent is required to register a caveat.

It is then up to the lender, if they wish to obtain consent in order to potentially convert the caveat into a second mortgage, or simply leave the caveat as is.

What Are Short-Term Caveat Loans?

Caveat loans are also shorter-term loans than mortgage loans are. They are usually short-term loans for periods of up to three years, whereas the standard terms for a mortgage loan in Australia are 25 or 30 years.

Bridging finance is the most common example of a short-term caveat loan. A bridging loan can be necessary to cover the period between buying a new property and selling an existing property. ‘Interim capital’ or ‘interim finance’ this is sometimes called.

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What Are The Advantages Of Caveat Loans?

Caveat loans are ideal for short-term funding needs. They can also provide you with the following major advantages because of the property security that the lender has:

  • Minimal documentation requirements as part of the loan application process (for example, no proof of income requirements).

  • A higher chance of loan approval (even if you have a bad credit history).
  • Faster loan approval (which is especially important if you need fast finance) due to the lower caveat lending criteria.
  • Quicker access to your approved funds. In other words, you’ll have the finance you need fast.

What Can I Use A Caveat Loan For?

A caveat loan can be used for a wide range of business purposes, including:

  • Property development projects (including renovations and improvements).
  • Buying other real estate (including both vacant and non-vacant land).
  • Purchasing a business.
  • Expanding your business.
  • Buying stock for your business.
  • Refinancing/debt consolidation (transferring multiple debts into a single debt to make managing your repayments easier).
  • Assisting with any business cash flow issues you may have.
  • Bridging loans.
  • Paying tax debts to the Australian Taxation Office.
  • To help your business to survive a downturn like the economic effects of the COVID-19 crisis.
  • Providing quick funding to help you to capitalise on business opportunities before your competitors can.

How Do Caveat Loans Work?

Once your caveat loan is approved, your lender will register their caveat (interest) in your property with the relevant land title office in your State or Territory. For example, Land Registry Services in New South Wales and Land Use Victoria.

It’s important to understand that a property can only be used for a single caveat loan at any one time. Once the loan is repaid, the caveat is removed. The property can then be used for another caveat loan if necessary.

You can also read our dedicated blog post How Does A Caveat Loan Work?

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What Documentation Do I Need For A Caveat Loan?

The minimal documentation needed for a caveat loan is undoubtedly one of the key benefits of this type of finance. All that you need to supply is:

  • Proof of your identity.
  • Property ownership proof (either outright, or details of the amount of equity you have in the property).
  • A realistic plan that shows how you will be able to repay the loan. This could include:
    • The sale of another of your assets in the case of using a caveat loan for bridging finance.
    • Loan refinancing arrangements if you are using a caveat loan for debt consolidation purposes. Debt consolidation can be a good strategy to eliminate high-interest debt like credit card debt or personal loans.

Who Can Get Approved For A Caveat Loan?

One of the best features of caveat loans is that anyone who owns a property (or who has a level of equity/ownership in a property) can successfully apply. This includes borrowers who are self-employed and/or who have a bad credit history. These types of borrowers often find it difficult to satisfy the strict lending criteria of banks for their range of finance products.

You will have a level of equity in a property if you have been paying it off over time. Your level of equity in a property grows over time in two ways, via:

1) Loan repayments that you make.

2) The property increasing in value over time (Australian real estate prices have a long-term record of growth, even if there are shorter-term periods where prices stagnate or even fall in some markets).

For example, let’s imagine that you purchased a property in Sydney ten years ago for $595,000 (the average price at the time) and that you borrowed $500,000 to do it. At that time, your equity in the property would have been your deposit of $95,000.

Fast forward ten years and the average Sydney property price now is $867,000 and you owe $350,000 on your mortgage. That means you now have $517,000 worth of equity in your property. This equity can be used as security for a caveat loan. A caveat loan for the equity that you have in your property can be placed behind the mortgage that you have. In other words, you can take out a caveat loan even if you still have a mortgage.

Why Do Borrowers Get Caveat Loans?

Caveat loans are popular among borrowers who:

  • Need funding quickly.
  • Have bad credit.
  • May not satisfy the strict lending criteria of banks and who source funds through the private lending market instead.

The private lending market is the fastest growing loan sector in Australia.

More than one in four loans in Australia is now provided by private lenders (private companies or individuals).

DFS private loan caveat contracts and transactions are handled by specialised and experienced third party law firms based in New South Wales, Australia.

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How DFS Can Help You With A Caveat Loan?

DFS is a private lending specialist in caveat loans.

We understand the importance of quick loan application approvals and settlements to help our clients.

If you own real estate, you can use it as security for your caveat loan and we’ll arrange hassle-free finance for you on the best possible terms and conditions from one of our panel of over 200 private lenders. At DFS we:

  • Have a simple application process that you can do online.
  • Don’t conduct credit history investigations or lengthy and time-consuming bank-style assessments of loan applications.
  • Provide you with the type of personalised customer service and tailored solutions that you just don’t get when you go with the big banks. We realise, just like us, our clients are real people. We enjoy getting to know our clients and building relationships.

What all that means for you is that you’ll get your caveat loan approved much quicker and you’ll also get the funds that you need fast.

Once you have applied for caveat loan with DFS, we’ll take care of the rest. We will quickly:

  • Assess your application.
  • Provide you with an offer to consider if we can arrange funding for your loan with a suitable private lender.
  • Arrange an independent third-party property valuation as a condition of the offer if necessary.
  • Take care of the all the caveat loan paperwork (if the property valuation is acceptable to our private lender and you accept the private lenders offer).
  • Arrange for the transfer of the caveat capital funds to your nominated account.

Alternatively, if you don’t want to apply for a caveat loan online or you want to find out even more about this convenient form of finance, you can simply contact us online with your enquiry or you can call us on 1300 94 22 33.

One of our loan specialists will take the time to discuss your needs and how a caveat loan secured against your property might be a great option for you.

We’ll also be happy to answer any questions you may have about caveat loans or any of the many other forms of finance that we offer to our clients. We’d love to hear from you!

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